In the current climate, more and more companies are facing financial distress and entering some form of insolvency proceedings. This on-demand webinar is aimed at in-house counsel, HR or other advisers of both potential buyers of insolvent businesses and the customers of services where the supplier becomes insolvent. It will provide you with a practical guide to the employment law issues which arise in situations of insolvency in order to help you mitigate potentially significant risk and liabilities.
Jane Fielding: Good morning and welcome, I am Jane Fielding and I am Head of the employment, labour and equalities team here at Gowling in the UK and this is the first of our series of four webinars which we are putting on over the next couple of weeks to replace our usual annual update seminar when we host you in our offices and give you an update on what is coming down the tracks for the year ahead. Sadly, we really hoped to be able to host you in the offices this time but, unfortunately, that is not the case. I am sure like us many of you are working from home but I really hope that by June when we do our mid-year review that we will be able to host you again but we will just have to see.
For now, so we have these four webinars planned and the first topic that we have chosen is insolvency and particularly obviously the employment law aspect of insolvency.
Now, with the impact of the pandemic ongoing and likely to get worse when the various government support measures end in a few months' time and the reality of Brexit hitting many businesses now, now we are outside the customs union, that we are seeing more insolvency situations arise and so we thought it was a timely opportunity to remind people of the key employment law issues that you need to be thinking about if you are faced with an insolvency situation.
It could be that there is an opportunity for you to buy an insolvent business in your sector, a business that is struggling and you see an opportunity to take over. It could be that you have to do something because one of your suppliers in your supply chain is struggling and that is going to impact on your business and so you either need to bring it back in-house or retender it. Whatever the situation is and whatever the type of insolvency that you are looking at, you need to understand the employment law framework and so that you do not end up making a difficult situation worse by triggering employment claims.
I am delighted that Hannah Swindle, one of the senior lawyers in our team who is an expert in this area is going to talk you through all the key things that you need to know about employment law and insolvency. Hannah is going to spend about 25 to 30 minutes talking you through that.
We have left some time at the end for questions. If you do want to ask a question, then please can you type it into the Q&A function which you will find in the middle of the bottom of your Zoom screen and we will do our best to pick up as many of those as we can in the time available. If you have a technical problem hopefully, there will not be any but if you do have one, please feel free to use that Q&A function for that as well. Lucy Strong, who is helping us with the tech side of things today, will do her best to help you with whatever problem you have got. As I say, hopefully, the tech will all work and on that note, I will hand over to Hannah.
Hannah Swindle: Thank you, Jane. Good morning everyone, thank you for joining the webinar. As Jane mentioned, this one is aimed at in-house counsel or advisors facing the potential buyers of insolvent businesses and the customers of services where the supplier becomes insolvent. As Jane mentioned, it is clear both scenarios are becoming more common, the numbers of companies facing insolvency is definitely on the increase. There are employment law considerations and implications which are relevant for both.
This morning I am going to provide you with a practical guide to those employment law issues and potentially significant risks together with some ways of mitigating them. I am going to talk about the effect on employment contracts of the main insolvency procedures, a summary of the government employee protection, the effects of TUPE in an insolvency outsourcing situation, including the potential risks for a buyer or a customer of services and some ways to mitigate those risks. I will also mention the government's coronavirus job retention scheme in the context of insolvency.
Before I start, I wanted to highlight that of course employment law considerations are relevant for companies which are facing insolvency situations themselves and for insolvency practitioners. These considerations are different and I am not going to cover them in the webinar today.
The type of insolvency has a different impact on employee's contracts of employment. As we have got limited time this morning, I have concentrated on the main types of insolvency proceedings only. So, first a compulsory liquidation. In a compulsory liquidation, contracts are automatically terminated on appointment of the liquidator by the Court but it is still treated as a redundancy. So the employees can still claim their statutory redundancy pay and also some of their unpaid wages, holiday and notice pay from the government's national insurance fund. Where there are 20 or more redundancies, employees can also bring a claim for a protective award for failure to collectively inform and consult.
In a members and creditors voluntary liquidation, contracts of employment are not automatically ended because the business as a company carries on, although it is likely there is going to be redundancies shortly afterwards when the business is wound up.
In an administration, contracts of employment with the company continue. The administrator is an agent of the company so the identity of the employer has not changed. To terminate employment contracts, the administrators have to carry out redundancies which they are likely to do before they have been appointed 14 days because after that time they are judged to have automatically adopted the employment contract and that means that certain employee liabilities or debts have super-priority.
Finally, CVAs or company voluntary arrangements do not immediately affect contracts of employment. The company continues here as a going concern.
Where an insolvent employer owes an employee money, some can be claimed from the Secretary of State by way of the national insurance fund. Employees or workers can claim up to eight weeks of unpaid wages and that is up to the maximum weekly cap, which is currently £538. The wages claimed can include a protective award. Employees can also claim up to six weeks accrued or taken holiday pay up to the weekly limit. Statutory redundancy payments, statutory notice payments and also a basic award for unfair dismissal where they have brought a successful claim but in the usual way employees cannot usually claim both this and statutory redundancy. They can also claim some pension contributions and unpaid benefits such as statutory maternity pay or sick pay. These amounts are important in the context of TUPE as I will come on to because they do not transfer to an incoming employer under TUPE and insolvency scenarios.
Moving on the TUPE now and its impact on insolvent sales and in outsourcings. I am conscious some of my delegates will not be employment specialists so as a quick reminder, TUPE applies to a relevant transfer. This can be a sale of a business as a going concern or alternatively an outsourcing or insourcing of services where there is a transfer of activities which remain fundamentally the same and there is a grouping of employees who have been organised deliberately to carry out activities for that particular client.
Where TUPE applies, employees and workers who are assigned, or in the other words essentially dedicated to the business or service, automatically transfer to the incoming employer or transferee on the existing terms and conditions of employment. They keep their length of service and they transfer with all their existing rights and liability, although there are some exceptions for occupational pension schemes and criminal liabilities.
Insolvency scenarios also have some further exceptions which I will speak about in a moment.
TUPE also gives transferring employees some increased protection, both around changing terms and conditions of employment and dismissal. Any changes which are by sole or principal reason of the transfer are void. Changes which are unconnected with the transfer or for an economic and technical or organisational reason entailing changes in the workforce and where the employee agrees those changes are permitted. This is going to be relevant for any incoming employer as it means that it is harder to change terms and conditions of the transferring employees' post-transfer but there is a slight relaxation where insolvency proceedings apply which I will come on to.
Any dismissal which is by sole or principal reason of the transfer is automatically unfair for employees or more than two years' service. Any unfair dismissal liabilities transfer to the incoming employer. This is very relevant for a buyer where dismissals have already been made in the insolvent seller's workforce. So, for example, they may have been made to make the business more attractive for a sale because the buyer can inherit any liabilities where successful claims are brought by the ex-employees.
Dismissals which are for economic, technical or organisational reasons can be potentially fair. So, for example, this might be where there is a genuine redundancy situation. Under TUPE, the outgoing employer is obliged to provide employee liability information which is a certain minimum list of information about the employees including their main terms and conditions of employment, information about any claims and collective agreements and that has to be provided no later than 28 days before the transfer.
Finally, the other main point of TUPE is that outgoing and incoming employers must provide employee representatives who will be trade union, staff counsel reps, especially elected reps with certain information about the transfer and consult with them about any post-transfer changes or measures proposed by the incoming employer. If there is a failure to comply, compensation up to 30 weeks gross pay can be awarded. That is basically a quarter of the wages bill.
Importantly, for a solvent buyer of an insolvent business, liabilities are joint and several between the outgoing and the incoming employers. The main obligation to carry out that information and consultation is for the outgoing employer which usually means that they have the primary liability, but here because the outgoing employer is insolvent, the solvent buyer could end up with all of that liability.
If there are special circumstances which mean that it is not reasonably practicable for the consultation to be carried out, there is a defence available but the tribunals have all confirmed that this is going to be interpreted in a really limited way. It is not enough that there is an insolvency situation. That does not get you home and dry. It does not necessarily mean that the tribunal would consider that it was not reasonably practicable for the parties to consult. But it might be enough if the insolvency situation happens fairly suddenly but in any event, case law has also confirmed even then you have got to do what you can in the time available.
In an insolvency situation, there could be a relevant transfer where a buyer is buying an insolvent business or where a supplier of services is in insolvency proceedings and the customer is either going to take those services back in house or appointing a replacement. There are special rules in TUPE which apply and they are aimed at trying to save jobs by making failing businesses more attractive to buyers.
For the purposes of TUPE, insolvency proceedings are split into two types. The first type of proceedings are called non-terminal and they are dealt with under regulation 86 of TUPE and these are relevant insolvency proceedings which have been opened not with a view to the liquidation of the assets of the transferor. It is crystal clear what that means is it not? Government guidance suggests that this will include a number of different insolvency procedures, including administration and that could be an ordinary administration or a pre-pack which is where there is an immediate sale of the business on appointment of the administrator. In non-terminal proceedings where an insolvency practitioner has been appointed, TUPE applies but with some slight changes or relaxations.
Employees will retain most of the TUPE protection. There is still an automatic transfer of all assigned employees, not just the ones that you might want to keep on. There is a requirement on the outgoing employer to provide employee liability information but often an administrator who has come in is not going to have the time or the information available to be able to comply or to comply fully even if it can do something. The obligations on the incoming and outgoing employer to inform and consult will also still apply.
I have already mentioned that the buyer may end up with liability for information and consultation liabilities even though the main obligation to consult belongs to the outgoing employer. Liability under TUPE is joint and several so the whole award could potentially be enforced against the buyer.
There is going to be a transfer of most pre-existing employee liabilities to the incoming employer and these could be significant where the outgoing employer is insolvent. Liabilities can be made up of pre-existing salary arrears, unpaid holiday and any ongoing claims caused by the sellers' acts or omissions pre-transfer. For example, discrimination. There are some outstanding liabilities and these are mostly limited amounts of pay arrears will not transfer to the incoming employer and can be claimed by the employee from the national insurance fund. Those are the amounts I mentioned earlier. These are the eight weeks' pay, six week's accrued holiday pay and some pension liabilities. Those claims are taken over by the government and so the debts remain with the outgoing employer or company in administration. Redundancy payments are not mentioned here in the TUPE relaxation because there is no termination of employment where an employee automatically transfers under TUPE.
It is also often the case that a seller or administrator will make dismissals before a sale. If the real reason was to make the business more attractive for a buyer rather than a genuine redundancy connected automatically unfair dismissal liabilities are going to end up with the buyer.
There may also be collective redundancies pre-transfer which are where 20 or more dismissals are proposed of employees who would otherwise have transferred. If the relevant obligations to consult are not complied with then employees can also claim for a protective award. The liability for this award may also transfer.
I have mentioned that some flexibility is permitted in relation to hanging terms and conditions of employment. Normally, TUPE restricts the ability of an employer to make changes by principal reason of the transfer. In an insolvency situation, if certain conditions are satisfied, the transferor or the transferee can agree what is called permitted variation to terms and conditions of employment of assigned employees. The reason for the changes has to be to safeguard employment opportunities by ensuring the survival of the business not just to make it more attractive for sale, for example. There also has to be consent from appropriate representatives who cannot just go directly to the individual employees. The conditions that have to be met are quite stringent and even if you jump through all the hoops, it is not certain that any changes will be valid until they are tested at tribunal. I think this means the provisions have limited benefit really and I have never seen them used by a client.
The effect of TUPE results in increased risk for a potential buyer or an incoming provider of services or the customer so in a solvent sale, employee risk is commercially apportioned between the parties using contractual indemnities and warranties. A buyer would receive these from a seller and an incoming employer in an outsourcing situation would usually be able to benefit from indemnities given by and the existing supplier or service provider. In this way, the incoming employer protects itself against any employees who have not been identified as transferring unexpectedly claiming to transfer and also any pre-transfer liability. It can also protect itself against the outgoing employer's failure to inform and consult for example.
In practice, in an insolvent sale, a buyer is not going to get any indemnities and warranties. The seller would not be able to pay out under them in any event. All employers in scope will transfer with all their existing pre-transfer liabilities save for the amounts that can be claimed from the national insurance fund. Deals are often fast-paced in an insolvency situation so there is less time than usual for due diligence or even that information my just not be available. The incoming employer could also inherit liabilities from any employees who have been dismissed by reason of the transfer. It does not matter if those dismissals have been made before a potential buyer has been identified. This can be a significant issue if large scale redundancies have been made of a unionised workforce. Or alternatively, if a buyer only wants to take on some of the seller's employees and leave the rest behind, he will then be made redundant by the administrator. There is risk attached to any who are dismissed.
An incoming employer would also usually obtain an indemnity to cover any liabilities resulting from the failure of the outgoing employer to inform and consult. This is a real problem in an insolvency situation because there is often not enough time to do this process properly and a claim is a real possibility. Although it is fair to say that it is more likely in a unionised workforce.
In an insolvency situation where a solvent buyer is purchasing business from an administrator, buyer risk is also increased because they are often asked to cover increased liabilities under the sale agreement. This is something to look out for. An administrator often wants the buyer to take on all employee risks and liabilities not just in relation to those that are transferring. They want a clean slate going forward because this helps their creditors. They often also want the buyer to underwrite those national insurance fund liabilities, those amounts the employees are owed by their insolvent employer which they can claim from the government. Those liabilities do not transfer to the buyer under TUPE as mentioned and when the government pays out money to the employee, it takes over the employees claim in the administration. The administrator often asks the buyer to take on this liability under the agreement so that they do not have any outstanding claims.
The buyer should try and limit the contractual protections it gives as far as possible, although I recognise that the ability to push back usually depends on the commercial bargaining position.
How should a buyer proceed? As the first step, make sure that you are clear what insolvency procedure is being used, this is really important because it affects what happens to the employees' contracts of employment as we have seen and it also affects the impact of TUPE. If a terminal insolvency proceeding is being used which I will come on to next, the position for a buyer is very different but if we assume that the procedure used is administration and there will be an automatic transfer of employees what can you do to mitigate the potential risk. First of all, try and do as much due diligence as possible. This way the size of the likely risk can be determined, you can see if the deal is worth it.
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